No Longer Cheaper by the Dozen

WHY YOU SHOULD CARE

Because the data-drenched economy might not be all good news for your pocketbook.

September 4, 2014

Sometimes, it’s best not to declare your love out loud. Especially when you’re shopping.

We’ve long brought certain assumptions to shopping, whether for cappuccinos or plane tickets or MP3s. We expect to get a better price when we buy in bulk — after all, that’s the M.O. behind everything from Costco to supersizing. We believe there are perks for frequent patronage. And we’d like to believe that Joe the plumber and Hillary Clinton would pay the same amount for the same beer at the same retailer.

But times are changing, and so are the core precepts of modern consumption. In the data-driven economy, the more you buy, the more you may end up getting charged. The more faithful you are to a certain company, the easier it is for the company to take advantage of your loyalty.

“The old conjecture — through the ’90s — was that Internet shopping would make everybody more price-sensitive,” explains Priya Raghubir, chair of the marketing department at NYU Stern School of Business. Which should get you a better price. But there’s a “more recent phenomenon” at play here, she says: The consumer might be worse off.

The reason is simple, if creepy: Let’s just say that if an auctioneer sees you tripping over yourself to raise your paddle in bid, she’s probably going to charge you more. And in the online world, it’s much easier to witness bidders’ enthusiasm.

Companies now have more information about you than ever — and not just basic stuff, like your ZIP code and gender, but also granular data, like how often you buy a certain make of harem pants, and whether you comparison shop, and how often you ogle that $750 pair of Louboutins. Industry observers say the trend is most prevalent in the retail industry, but it’s not likely to stop there. Companies are devoting more of their budgets to pricing strategy, including technology and data, and they’ll use it in the name of ever more nuanced discrimination, experts say.

Of course, price discrimination of some sort is as old as the bazaar itself. Sellers have always tried to size up buyers and use the bits of information they glean to set prices. Got an American accent in an Istanbul market? You probably can’t haggle the price down much.

There are online equivalents, most perfectly legal. If you’re shopping from a Manhattan zip code or logging in with a Mac instead of a PC, Orbitz concedes that you’ll pay more for your hotel. Indeed, it’s not hard to find examples of different people paying different prices based on their demographic checkboxes. Airlines and eBay have long been ace at price discrimination, as have many other companies.

What’s new is that the algorithms that gather data are more and more sophisticated, giving companies better tools to discriminate. How you browse the Web tells companies how much you want something. Do you skulk around wistfully? Restock your toilet paper every few weeks? Retailers now know how badly you’re craving their wares.

And savvy corporations hire brainy computer scientists to pore through data all day and reoptimize their prices millions of times a day, says NYU’s Raghubir. (Amazon, for instance, changes prices 2.5 million times a day.) As a result, companies are beginning to craft more, um, customized prices … just for you.

“This is really like a video game!” she says of complex price testing that turns us all into perpetual lab rats. And the scientists running it all? “These are kids,” she says. Twenty-something computer science whiz kids in hoodies “making some of the highest salaries ever.”

Source Getty

Company priorities are shifting, too, says Anindya Ghose, a marketing and IT professor at Stern. They once channeled much of their strategy budgets to advertising and marketing. Now they’re redirecting some of those millions to pricing strategy, a “historically underinvested sector,” with investments in technology, data and analysis that help companies reach that sweet spot where you’ll still buy their stuff but they’ll make the most money.

Over the long run, experts say, consumers won’t suffer horribly. Much of the wisdom about Big Data goes something like the logic of mutually assured destruction: Both sides have it, so neither can totally obliterate the other. “Data is making it easier for everybody,” said Jean-Manuel Izaret, a senior partner at the Boston Consulting Group in San Francisco. “In most situations, consumers are winning.”

That doesn’t mean there won’t be a few ground-game scuffles.

The way to beat this trend, ventures Raghubir, is to flirt a bit without showing your want too openly. Be coy. If you’re shopping for flights, for instance — she cites her own effort to buy a ticket to Costa Rica here — browse around. That tells travel websites that you’re price-sensitive and won’t shell out mindlessly.

But there’s a twist: if you end up back at a certain airline too often, you’ll lose your competitive advantage, and it’ll be clear you want to buy. It’s just as if you walked back to a stall in the bazaar after stalking away in indignant hagglers’ protest: Up goes the price.

Raghubir, for her part, thinks this dwindling of consumers’ bulk-advantage is so new that it could still peter out, though. Most people haven’t realized what’s happening yet. But when they do, all hell could break loose, she predicts.